Question

Your landscaping company can lease a truck for $7,300 a year (paid at year-end) for 5 years. It can instead buy the truck for $32,000. The truck will be valueless after 5 years. The interest rate your company can earn on its funds is 6%.

Answer 1

In this question I assume we are asked whether its better for the firm to pay 32,000 now or 7,300 yearly, if the interest rate is 6%.

The present value of 5 yearly payments of 7,300 when discounted by 6% is 30750.26 which is less than 32,000 which means that our company should lease the truck as leasing is cheaper.

Step-by-step explanation:

In this question I assume we are asked whether its better for the firm to pay 32,000 now or 7,300 yearly, if the interest rate is 6%. In this question we have to find out the present value of 7,300 yearly for 5 years and discount is by 6% in order to find out whether the present value of yearly payments is less than or more than 32,000.

7,300/1.06 +

7,300/1.06^2+

7,300/1.06^3+

7,300/1.06^4+

7,300/1.06^5

=30750.26

The present value of 5 yearly payments of 7,300 when discounted by 6% is 30750.26 which is less than 32,000 which means that our company should lease the truck as leasing is cheaper.